What ADB Says - Implementing Good Governance and Combating Corruption

Implementing Good Governance and Combating Corruption

41. Four conference sessions tackled the issues of Implementing Good Governance and Combating Corruption. The first, by Dr. Clay Wescott, a Senior Public Administration Specialist in ADB’s Regional and Sustainable Development Department, addressed the topic “Good Governance for Improved Tax Policy and Administration”. 42. Beginning a few years ago, the Asian Development Bank started to pay serious attention to governance issues. The Board of the ADB was the first of an international financial institution to adopt and implement a governance policy, defining governance as “The manner in which power is exercised in the management of a country’s social and economic resources for development”. 43. One challenge in approving the new policy came from Article 36 of the ADB’s Charter, which states that the Bank “shall not interfere in the political affairs of any member nor shall they be influenced in their decisions by the political character of the member concerned. Only economic considerations shall be relevant to their decisions...”. Yet, the policy justifies ADB’s governance work because “...the success of the ADB’s project investments depends on borrowers having a sound institutional framework, and implementation capacity”. 44. The policy specifies four elements of good governance: accountability, participation, predictability, and transparency. Accountability means, for example, calling tax officials to account for their actions. It means answerability: requiring officials to respond to questions concerning official actions. And, it means consequences: that there is certain punishment when officials or taxpayers are caught breaking the law. 45. Participation means encouraging feedback from taxpayers (facilitated by information and communications technology), investigative reporting by a free, professional media, and a role for commercial associations, lobbies, and direct action by citizens, through tax protests. The benefit of encouraging such participation is that it helps provide reliable information and serves as a reality check and watchdog on officials. However, many governments resist measures to increase participation. A recent study found that there was not a single World Bank project during the 1990s supporting tax reform with a component for improved tax administration. 46. Predictability means that tax regulations are clear, known in advance, and uniformly and effectively enforced with minimal discretion for tax officials. It also means that regulatory frameworks minimize hidden taxes. Corruption is the most common source of unpredictability. 47. Transparency means low-cost access to procedural information which is relevant and understandable. Information and communications technology offers good possibilities for the low-cost transfer of information. 48. One challenge for the ADB and other donors working in this area is that studies show that increasing aid to a developing member country can sometimes worsen governance. Data since 1995 show that countries receiving more aid tended to have increasing political instability, and worsening regulatory quality and rule of law. The possible reasons: aid can weaken institutional capacity, siphon off scarce talent from the bureaucracy, and weaken accountability. It can also lead to conflict over control of aid funds, and alleviate pressures to reform inefficient policies and institutions. ADB needs to be careful to avoid these problems in assisting developing member countries. 49. Good governance helps the poor by facilitating markets and economic growth, by promoting participation and empowerment, by ensuring that lawful taxes are paid so that public services are adequately funded, and by enabling delivery of high-quality services. Lower income homes pay more for corruption. In Bangalore, India, for example, 33% of poor reportedly have to pay bribes, while only 14% of the non-poor have to pay bribes. Corruption hurts the poor through lower growth, regressive taxes, reduced and lower quality services, higher investment risks, and lack of protection of legal and civil rights. 50. An area of increasing interest for governance reform is fiscal decentralization: transferring fiscal, political and administrative functions from higher to lower levels of government. There are three types of decentralization. Deconcentration means assigning certain functions to branch offices. Delegation means transferring tasks from one public agency to another agency or service provider. Devolution means transferring authority for tasks to autonomous, locallevel units. 51. Countries adopt fiscal decentralization in hopes of expanding democracy. They also hope for efficiency gains, and improved service through agency arrangements. In some cases, decentralization is a response to demands for regional autonomy. Questions for further research include: Has decentralization brought efficiency gains, improved revenue collection and/or expenditure management? If participation has increased, is there any evidence of corresponding improved systems of accountability? Where there has been an increase in local democracy, has it helped the poor? There is some evidence that middle and upper classes use well-financed lobbying to secure resources, despite demo6 ADBI Executive Summary Series No. S65/02 cratic structures. The poor have difficulties exercising political rights because of poor information, geographic dispersion, weak communication infrastructure, and fear of reprisals. 52. In order to plan its assistance to developing member countries, the ADB carries out three types of governance assessments: governance checklists, governance reviews, and performance based allocation ratings. The ADB then works with other agencies such as the IMF and the World Bank to provide coherent packages of assistance for improving public financial management and other aspects of governance. 53. Assessments of tax systems are important to carry out prior to designing such assistance programs. These assessments look at four main areas: policy formulation, accountability, service delivery effectiveness, and service delivery efficiency. 54. In the area of policy formulation, topics include performance of the policy function, including simplicity, equity and comprehensiveness of administrative law and taxpayer procedures. There are also capacity issues, including human resource quality and quantity for policy formulation and research, and institutional issues such as autonomy, budget, laws, organizational structure, no political interference in administrative decisions, and an appropriate tax structure. 55. In the area of accountability, topics include performance issues such as corruption, revenue loss due to administrative lapses, and quality and frequency of taxpayer surveys. There are also capacity issues such as quantity and quality human resources and other resources for management inspection, audit, anticorruption, training, and participation, as well as institutional issues such as internal and external audit programs, the availability of an ombudsman, the use of taxpayer surveys, the application of penalties, and the provision of incentives. 56. In the area of service delivery effectiveness, topics include performance indicators (same before and after reform). There are also capacity issues including quantity and quality human resources and other resources for management inspection, audit, anticorruption, training, participation, budget, and appropriate outsourcing, and institutional issues such as taxpayer identification, taxpayer education and services, appeals, information exchange and sharing, and clearance procedures. 57. In the area of service delivery efficiency, topics include performance indicators (same before and after reform), timeliness, convenience. Capacity and institutional issues are the same as for effectiveness. 58. Finally, assessments of tax policy and administration need to take into account relevant constraints such as the level of development, openness, the standards of the accountancy profession, financial and banking regulations, literacy, compliance attitudes of taxpayers, credibility of government, and civil service conditions. 59. The second presentation on the theme of good governance and combating corruption was by Mr. Jak Jabes, Advisor for Governance in the Regional and Sustainable Development Department of the Asian Development Bank. He explained the “Asia-Pacific Region’s Anti-Corruption Action Plan”. 60. Reaction towards corruption is not only because it is a nuisance. Economists estimate that corruption can cost up to 17% of a country’s gross domestic product in Asia, robbing the population of precious resources that can be used to reduce poverty and promote sustainable development. Corruption’s devastating effects on political stability and economic growth are further reinforced when money does not come or simply moves out. For instance, many countries with low scores on Transparency International’s Corruption Index have significant problems in attracting foreign investment. 61. The Anti-Corruption Action Plan’s origins date from 1999 when the ADB and the OECD commenced cooperation on raising awareness on corruption in the Asia-Pacific region. Two conferences had brought together civil servants, politicians, academics, media, civil society and business representatives to learn from each other the extent of the corruption problem in the region. During 2001, participants to these events mandated the two organizations to develop a useful instrument for the region. Working with experts from some dozen countries along with international civil society and the business community, the ADB and OECD facilitated the drafting of an action plan to address corruption in the region. 62. The plan, an historical first for the Asia-Pacific region, was adopted by 17 countries from the Asia-Pacific region meeting in Tokyo in November 2001. In May 2002, Kazakhstan became the 18th country to endorse the Action Plan. By endorsing the Action Plan, the participating governments pledged to undertake reforms that would curb corruption in their countries and to report the outcomes of these reforms to their peers, the other endorsers of this Plan. 63. The Action Plan is based on three pillars of action: developing effective and transparent systems for public service, strengthening anti-bribery actions, and supporting active public involvement in the process. One can view tax administration reform as taking place both at a policy level as well as at the administrative and management level. Much information from countries that have already undertaken reforms is available when it comes to tax policy. Developing countries often try to emulate such policy measures and pass the necessary legislation to allow changes in tax collection systems. Unfortunately, the problem often lies in implementation of policy, which has to be done through tax administrations at the national and local (regional, provincial, municipal) levels. Good tax policy that remains on books and cannot be implemented, because of administrative culture, low salaried personnel ‘seeking rents’, lack of appropriate information technology or lack of training which leads to low morale in civil servants working in tax areas. Furthermore, corruption in tax does not get reduced. 64. The Action Plan requires each country to identify a limited set of actions within the three pillars and to report on the reforms undertaken to a peer group within 12 to 18 months. A Secretariat of ADB and OECD provides support to help each country in implementing the Plan, and especially finding resources to facilitate reform. The endorsing countries constitute the Steering Group. 65. The Steering Group has met in 2002 and started examining projects being submitted by endorsing countries. Discussion has revolved around the necessity to reinforce actions at ADBI Executive Summary Series No. S65/02 7 the regional level and to continue the dialogue on anti-corruption among neighbouring countries. A medium-term strategy has also been agreed upon. 66. Tax reform requires political will, an administrative culture that emphasizes good governance, and the right reward structure for civil servants. There are examples of countries which have achieved this, such as Singapore, over a short period of time. Singapore’s success is mainly due to political leaders committed to an anti-corruption strategy which reduces opportunities and incentives for corrupt behavior. 67. While every international organization has positions against corruption and remedies for curbing it, experience suggests that in the Asia-Pacific region, an inclusive approach such as this one may have a real chance of success. Countries have endorsed a plan that was drafted by them on the basis of extensive consultation with their governments and revised to reflect a general consensus that provides a broad palette of reforms that participating countries can work on in the coming years. 68. The countries which have endorsed the Anti-Corruption Initiative, Bangladesh, Cook Islands, Fiji, India, Indonesia, Japan, Kazakhstan, Kyrgyzstan, Korea, Malaysia, Mongolia, Nepal, Pakistan, Papua New Guinea, Philippines, Samoa, Singapore, and Vanuatu, are working hard to meet the Plan’s implementation obligations. The Secretariat has started to work with countries which have not yet endorsed the Plan to seek their concurrence. The U.S. State Department has funded an advisor to work with endorsing countries and support them in their implementation efforts. The ADB believes that with realistic expectations and concerted effort, the Asia-Pacific region will embrace the fight against corruption in this new millennium and that this Action Plan will be a useful instrument. 69. A third session on Good Governance and Combating Corruption organized by Mr. Jak Jabes and Dr. Clay Wescott was based on roundtable contributions by conference participants. Participants were divided into five groups and each group identified priority policy measures they would recommend to attack corruption and to improve the integrity of tax administration in their jurisdictions. The results were plotted in a table and revealed a striking consistency. In particular, clear and comprehensive rules in lieu of ambiguity and discretion and open and transparent rule-making and administrative processes were nominated time and again as first priorities. 70. Subsequent roundtable discussions looked at a number of related issues including the question of whether revenue collection agencies should be constituted as independent entities or as government departments. The general consensus appeared to be that independence from political interference was the key to good governance and the form of the legal entity was not as important as its ability to operate free of such interference. 71. Another issue raised in the roundtable discussion was whether revenue authorities should be permitted to pay bonuses to staff for meeting collection targets. It was pointed out that such an approach is difficult to implement as the success of an agency rests on contributions by all levels of staff, not only the inspectors in the field, and in an efficiently operating agency it would be difficult to impossible to identify which aspect of the collection process had been most effective. More importantly, adoption of a system that tied remuneration to collections would indicate that officers had some discretion in the application of the law. Bonus based remuneration would not be possible under a regime based on a transparent and comprehensive law as there would be no scope for tax officers to exercise discretions in the interpretation or application of the law. Adoption of a bonus system thus presumed ambiguities and uncertainty in the law that invited discretion and ultimately corruption. 72. Finally, the fourth session on the theme of good governance and combating corruption was again by Dr. Wescott who looked at the role of information and communication technology as a tool to support reform in a paper entitled “Egovernment: Supporting Tax and Other Public Sector Reforms in the Asia-Pacific Region”. 73. E-government is the use of information and communications technology (ICT) to promote more efficient and costeffective government, facilitate more convenient government services, allow greater public access to information, and make government more accountable to citizens. 74. A number of basic principles are important to consider in adopting e-government. First, ICT is a tool, potentially powerful yet essentially no different from a photocopier or a car, in the sense that user needs and requirements must come first and dictate whether and how the ICT tool should be used. For certain functions, pencil and paper, or a telephone, or a faceto- face meeting, or a visit to the library is far more effective than computers or the internet. 75. This obvious point must be strssed because governments, consultants, or donor agencies often encourage computerizing anything in sight. Indeed, it could be argued that ICT innovation is now largely supply- and marketing-driven rather than dictated by the needs and requirements of the users. Thus, as for any tool, it is essential to assess realistically and compare the costs of a given ICT change with the actual benefits expected from it. 76. Second, the ICT “techie” and the “public manager” should not work in isolation from one another. Improvements in public- sector effectiveness stem largely from better rules and procedures in the sector concerned. To apply advanced ICT to obsolete or inefficient rules and processes means in effect to computerize inefficiency. Doing the wrong thing faster is not progress. On the other hand, the absence of relevant ICT knowledge risks either costly mistakes or missed opportunities for dramatic service improvements. 77. Third, ICT cannot substitute for good public management and internal controls. When Algeria’s state-owned banks introduced a computerized system, the result was not to improve the banking system, but to make more visible the inadequate accounting system and frequency of manual errors. In this way, ICT can contribute to structural reforms, but is only part of the process. 78. Fourth, the introduction of ICT can reduce corruption by better enforcing rules, reducing discretion of officials, and increasing transparency. Indeed, officials may resist new ICT systems for fear of losing corrupt incomes. Yet, while ICT 8 ADBI Executive Summary Series No. S65/02 eliminates many opportunities for corruption for those who do not understand fully the new technology, it opens up new corruption vistas for those who understand the new systems well enough to manipulate them. In a sense, ICT permits an intergenerational shift in corruption and rent seeking. 79. Fifth, there is considerable public and private sector experience showing that the acquisition of large ICT systems is a complex matter. For example, a study of ICT projects in the United States in 2000 found that only 28 percent were completed on time, within budget, and with full functionality; 23 percent were cancelled, and 49 percent were late, over budget or delivered with less than full functionality. 80. That said, ICT’s wonderful potential has been hardly used in most Asia-Pacific countries to increase government accountability, transparency, and participation; to improve the efficiency and effectiveness of public-sector operations; to widen access to public services; and to disseminate information to the public and get feedback from relevant stakeholders and service users. 81. Reasons for slow adoption of ICT by the Asia-Pacific public sector include the difficulty of attracting ICT professionals to public service, weak legal framework dealing with such matters as digital signatures, inadequate intellectual property protection, a lack of e-commerce rules, security issues, weak procurement procedures and standards for ICT, and the prevalence of silo systems where most communication is vertical rather than horizontal. Other factors include inadequate ICT infrastructure, high user charges, weak ICT planning, project management, support and monitoring of results, and supply driven projects, with weak assessment of user requirements. 82. Some jurisdictions, such as Singapore, Hong Kong, China and Andhra Pradesh state in India are quite advanced in egovernment, but they are the exceptions. In the tax area, many other governments have websites providing tax information, and some (e.g. Philippines, Indonesia) are experimenting with e-filing for large taxpayers. 83. E-commerce presents a potential challenge to tax authorities because of loss in tax revenues as products are shipped electronically instead of physically. Issues include how to define the product, and thus relevant trade treaty (GATT vs. GATS) that applies, opportunities for consumption vs. income taxes, and the need for international cooperation and harmonization of tax rules to encourage expansion of e-commerce, and to prevent tax competition. 84. The risks of e-government need to be carefully managed, including the difficulties of carrying out organizational change. Governments may need to change the way public agencies do business to accommodate off-the-shelf software (or face the cost and even potential drawbacks of customized software). This may mean changing laws and regulations, improving ICT awareness, and even shaking up important persons’ roles and responsibilities. 85. Governments also have to manage the risk of overly complex, customized and time-consuming procurement by carefully reviewing latest off-the-shelf products, starting small and scaling up fast, using success of pilots to secure commitment to change by management and staff, ensuring clear accountability in ICT projects, and recruiting and retaining talent. 86. Finally, there are major risks of possible alteration or loss of records during migration from manual to electronic systems, and the chance that essential functions will not be performed as new systems have teething problems. To minimize these risks, organizations can maintain manual backup until integrity of electronic system is assured, ensure the capture/creation of reliable records to serve as evidence of accountable acts and transactions, safeguard the integrity and authenticity of all records within the regime for as long as they are required, and provide for the accessibility and updating of records.